Tuesday, 2 October 2012

One step forward and two steps backwards?

Economics can often provide solutions to
problems while the study of politics can be about why the solutions are not
always easy to implement. This could be
seen as a bias interpretation but the changes in the fate of Spain over the
past month could possibility be an example.

The interest rates on Spanish government
debt tumbled at the beginning of September following the announcement of plans
by the European Central Bank (ECB) to buy an unlimited amount of bonds of
indebted countries in Europe (refer to “Whatever it takes”). This
should have been the beginning of the end of the debt crisis in Europe. But the mood turned sour as Spain once again
hit the front pages of the papers as politicians in Madrid and in the region of
Catalonia positioned themselves amidst the changing political landscape. As a result, the Spanish government is having
to fight to stay in the Eurozone as well as trying to hold the country
together.

The ECB made a bold stand in its
willingness to stand behind countries like Spain who suffer from excessively
high interest rates as a result of concerns over a possible breakup of the
Eurozone. If the ECB makes good on its
pledge to do “whatever it takes” to save the euro, investors have less to worry
about and renewed buying of Spanish bonds should help bring down the interest
rates on the government debt. But in
practice, the best laid plans do not always work out.

The backing of the ECB required countries
to submit to supervision from the EU and the IMF which makes the help offered
by the ECB less attractive. Losing
control of their own affairs is a fate that those in power do not welcome and
the Spanish government is holding off on asking for help from the ECB. But the daunting nature of the economic
problems in Spain suggests that help from outside is inevitable. Real GDP in Spain is expected to shrink by
1.5% in 2012 and 0.7% in 2013 according to the IMF while the government debt
continues to increase. The Spanish
government is expecting to borrow 207.2 billion euros in 2013 which is more
than its plans for 186 billion euros in new debt in 2012. An examination of Spanish banks this week
suggests that a further 60 billion euros are needed to stabilize the banking
sector and some of these funds may have to come from the government.

However, help from the ECB may be on the
way as the Spanish government is making moves in the right direction and is in
the process of implementing many of the policies that would be required of it
if the country needed assistance from the ECB.
This may be crucial as the Spanish prime minister Mariano Rajoy has
remained firm in his stance that he will not accept conditions being imposed
from outside. Yet, if the prescribed
policies had already been put in place, the outside help need not require any
further harsh measures. But the policies
of austerity have resulted in protests in Spain so the government is treading a
fine line and the possibility of turmoil is never far away but at least efforts
towards a solution are in the process of being made.

The political difficulties of cutting
government spending and raising taxes would be more than enough to deal with. But the tough measures taken by the
government have triggered another crisis – the perennial issue of secession in
Spain. Catalonia which is centred on
Barcelona is both the wealthiest region in Spain as well as the region which
has the most debt. Its prosperity means
that Catalonia provides more tax revenue to the central government in Madrid
than it receives in government spending.
But, at the same time, the regional government in Catalonia has had to
ask Madrid for just over 5 billion euros as investors will no longer lend the
region any money. This contraction has
been jumped on by politicians in Catalonia who want to push for independence
for the region and a snap election for the regional government in Catalonia has
been called for November which is being seen as a proxy referendum on the
possibility of secession. A crisis is always a good opportunity for
politicians to push for change even if it adds to the mayhem.

But such is politics. Politicians must keep voters happy to stay in
their jobs while others will take their opportunity to grab for power. But this is not always conducive to
action. It is no coincidence that the
ECB has been able to make bold policy shifts while governments in the various
countries in Europe (including Germany) have been squabbling on the
sidelines. The messy politics in
democracies can get in the way of doing what is required. If only economists ruled the world!